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Soft budget constraints: An institutional interpretation of stylised facts in economic transformation in Central Eastern Europe

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  • Raiser, Martin

Abstract

Among the stylised facts of economic transformation in East Central Europe are the following unpleasant developments-: the reemergence of fiscal deficits, the resilliance of medium inflation, and sluggish output recovery. This paper reviews the major interpretations found in the literature, including structuralist and demand-led approaches, and argues specifically against macroeconomic policy reversal. The concept of soft budget constraints for the state owned enterprise sector is used to develop an institutional interpretation of macroeconomic imbalances in the transformation process. Appropriate indicators of budget softness are derived and applied to the Polish evidence. The results support the hypothesis that current macroeconomic policy concerns are related to the continuing tolerance of loss making firms.The causes of soft budget constraints are found in perverse incentives in the financial sector, unclarified ownership rights, and the political reluctance to face large scale unemployment. A strict enforcement of bankruptcy is urged as a precondition for successful structural transformation.

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  • Raiser, Martin, 1992. "Soft budget constraints: An institutional interpretation of stylised facts in economic transformation in Central Eastern Europe," Kiel Working Papers 549, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:549
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    1. Raiser, Martin, 1993. "The no-exit economy: Soft budget constraints and the causes of success or failure of economic reforms in developing countries," Kiel Working Papers 581, Kiel Institute for the World Economy (IfW Kiel).
    2. Martin Raiser, 1993. "Old habits die hard," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 28(4), pages 170-177, July.
    3. Nunnenkamp, Peter, 1995. "Wirtschaftsreformen in Entwicklungs- und Transformationsländern: Anreizprobleme, Glaubwürdigkeitsdefizite und die Erfolgschancen umfassender Reformen," Open Access Publications from Kiel Institute for the World Economy 1636, Kiel Institute for the World Economy (IfW Kiel).
    4. Raiser, Martin & Nunnenkamp, Peter, 1993. "Output decline and recovery in Central Europe: the role of incentives before, during and after privatisation," Kiel Working Papers 601, Kiel Institute for the World Economy (IfW Kiel).
    5. Holger Schmieding, 1993. "From plan to market: On the nature of the transformation crisis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 129(2), pages 216-253, June.
    6. Raiser, Martin, 1993. "Governing the transition to a market economy," Kiel Working Papers 592, Kiel Institute for the World Economy (IfW Kiel).
    7. Koop, Michael J. & Nunnenkamp, Peter, 1994. "Die Transformationskrise in Mittel- und Osteuropa: Ursachen und Auswege," Open Access Publications from Kiel Institute for the World Economy 1590, Kiel Institute for the World Economy (IfW Kiel).

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